IN-DEPTH: TRANSCRIPTION - UnderTheLens - 11-23-22 - DECEMBER - Financial Repression


Download Slide Deck



Thank you for joining me. I'm Gord Long.

A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussion purposes ONLY.

Always consult a professional financial advisor before making any investment decisions.


Debt often produces the highly visible and often public drama of default and restructuring.   Countries often experience this as we witnessed in Latin America in the 80’s and too regularly with many wayward Emerging Market countries with their debt obligations to the IMF.

However, for developed economies another approach emerged from the Breton Woods conference at the end of WW II which avoided default, restructuring (or forcible debt conversions) as well as hyperinflation as debt reduction mechanisms.

It is officially called a Monetary Macroprudential Policy or unofficially and most commonly referred to as simply Financial Repression. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial Repression offered an approach which was most successful in liquidating debt when accompanied by inflation.

At its core it is most basically a tax on bondholders and savers via negative or below market real interest rates.


I have written about it extensively over the years since I first wrote my 2012 Thesis Paper entitled Financial Repression which can be found on the web site.

Additionally I originally co-founded the Financial Repression Authority with my colleague Richard Bonugli in 2015 which can be referenced at

The purpose of this video on the subject now is that my research suggests we are entering a regime change in the application of Financial Repression.

As such I would like to cover the subjects highlighted here.


First, let’s define what constitutes Financial Repression


Throughout history, debt/GDP ratios have been reduced by

  1. Economic growth,
  2. Substantive fiscal adjustment/austerity plans,
  3. Explicit default or restructuring of private and/or public debt
  4. A surprise burst in inflation
  5. A steady dosage of financial repression accompanied by an equally steady dosage of inflation.


  • Options 4 and 5 are viable only for domestic—currency debts.
  • Since these debt-reduction channels are not mutually exclusive, historical episodes of debt—reduction have owed to a combination of more than one of these channels.


There is considerable country specific variation in the extent of implementation of financial repression. Two elements however are consistent:


  • When controlled nominal interest rates coupled with inflation produce negative real interest rates, it liquidates (reduces) the stock of outstanding debt.
  • This is referred to as the Liquidation Effect.


  • Even in years when real interest rates are positive, to the extent that these are kept lower than they otherwise would be via interest rate ceilings, large scale official intervention, or other regulations and policies, there is a saving in interest expense to the government.
  • These savings are sometimes referred to as the Financial Repression Tax.


- Most (if not all) real interest rates were significantly lower during 1945–1980 (in red in the center) than in the freer capital markets before the depression and World War II (on the left in grey) and after financial liberalization in the 1980s (on the right in grey).

- The 1930s and 1940s were littered with default and debt conversions, while the post WWII era tilted toward a heavier reliance on financial repression to deal with the legacy of high war debts.

- For advanced economies, real interest rates were negative in about half of the years of the financial repression era compared to less than 10 percent of the time since the early 1980s.

- Financial repression in combination with inflation played a quantitatively important role in limiting interest payments and reducing debts. Average annual interest expense savings for the 12-major country sample range used here was from about 1 to 5 percent of GDP for the full 1945–1980 period.

- The average annual liquidation effect (debt reduction during years of negative interest rates) ranges from 0.3 to 4 percent of GDP for the full sample. Such annual deficit reduction quickly accumulates (even without any compounding) in the course of a decade

- As to the incidence of liquidation, Argentina sets the record with negative real rates recorded in all years but two from 1945 to 1980.

- Financial Repression was relatively more important than unanticipated inflation for the sample as a whole, although the latter played a more prominent role in the later stages of Financial Repression in the 1970s.

- The most significant savings materialize in the decade after WWII when debt levels were highest and in the 1970s when inflation accelerated.


  • Prior to the 2007 crisis, it was deemed unlikely that advanced economies could ever experience financial meltdowns as severe as those of the Pre-World War II era,
  • The prospect of a sovereign default in wealthy economies was similarly unthinkable.
  • Repeating that pattern, the ongoing discussion on debt reduction has focused almost exclusively on the role played by fiscal austerity or adjustment.
  • It apparently had been collectively forgotten that the widespread system of financial repression that prevailed worldwide from 1945 to the early 1980s played an instrumental role in reducing or liquidating the massive stocks of debt accumulated during World War II in many of the advanced countries, United States included.


What was required and emerged was Financial Repression in a slightly different form.

When we formed the Financial Repression Authority we summarized it in this form where it was more focused towards:

  • Negative Real Rates
  • Inflation
  • Obfuscation or much more attention to the public narrative. and
  • Ring-Fencing Regulations

All intended to:

  • Minimize the Risk of Derivative Meltdown,
  • Maintain Economic Growth,
  • Minimize Risk of Financial & Economic Growth.
  • Maintain Confidence in Government.

Areas that were increasingly needed to appease an every more sophisticated Global Market.


I will call the Post Financial 2008 Crisis era as Financial Repression Mod II.

The techniques used both globally and within the US became even more encompassing in the form of Government controls and expanded techniques such as QE, Operation Twist, Taper, QT et al.

Just too briefly highlight what we saw globally was:

Explicit or indirect caps or ceilings on interest rates, particularly (but not exclusively) those on government debt.


The Creation and maintenance of a captive domestic audience that facilitated directed credit to the government.


This involved in some countries:

  • Capital Account Restrictions,
  • High Reserve Requirements,
  • “Prudential” Regulatory Measures requiring that institutions (almost exclusively domestic ones) hold government debt in their portfolios (pension funds have historically been a primary target).
  • Transaction Taxes on Equities
  • Act to direct investors toward government (and other) types of debt instruments
  • Prohibitions on gold transactions


It also involved:

  • Direct ownership (e.g., in China or India) of banks or extensive management of banks and other financial institutions (e.g., in Japan) and
  • Restricting entry into the financial industry and directing credit to certain industries
  • Yield Curve Control in Japan


Government Securities Price Support via QE, Operation Twist and endless Credit Facilities to stabilize markets for example during Covid-19.


Then we even saw the Fed buy High Yield Corporate Bonds which they were explicitly not allowed to do .. but did it anyway with no push back from a scared and paralyzed Congress. That was a real learning point for the Fed on what it could get away with – to be honest!


There has emerged an environment where almost anything goes if it keeps the house from collapsing.

There appears to be no limits to what the Fed and Government Regulations will not adjust to maintain stability.

The problem is that it is no longer working as effectively as it once did!


With this amount of resulting destabilizing financial chaos going on in Monetary Policy it easy to lose perspective.

Our focus should simply be on the central tenet of what central banks and monetary policy are truly committed to.

That is

  • The ongoing financing of the government and
  • Ensuring that ever growing government debt is kept within manageable parameters.


Let me explain what I mean by that.

Since 2008 during the era of four enactments of Quantitative Easing and an Operation Twist the Federal Reserve has kept interest rates very close to the zero bound. Retirees and those depending on interest income received close to o% interest. Meanwhile Inflation according to official CPI numbers could never achieve the 2% central bankers target of 2%.

What this meant is we lived during an era of negative real interest rates – the goal of Financial Repression.

However with the Inflation shock associated with Covid-19 induced Supply Chain disruptions, Energy and Food shortages, as well as the Ukraine War matters have changed regarding the central Banks achieving the Zero Bound.

Instead we have nominal rates around 6% with inflation in the 8% range giving us temporarily negative 4% real rates.

This suggests that in actuality all the strange things that are occurring are actually delivering more than Financial Repression was delivering over the last decade.

As I said in one of the first slides in this video there are two elements occurring together that truly deliver reductions to the government’s debt load:

  1. An Inflation Shock
  2. Negative Real Rates.

We temporarily have both and the Fed keeps telling us to expect rates to stay higher for longer in its fight against Inflation.

We can expect Inflation to eventually fall and rates to likely fall with them.

In actuality the central Banks have positioned us for a new regime.

This will be an era where we have 4% plus inflation and rates likely in the 3% range.

As much as everything changes we are right back where the government needs to be to achieve debt reduction.

Two points to remember:

  1. The central bank have the issue of debt payments in the short term so lower rates to 3% versus much higher is required,
  2. Even though in the post WWII era rates were higher at 6% we had big fluctuations in inflation where in the 70’s we were in the 7%+ range.


1.2% may possibly sound inconsequential to you but Financial Repression is about the long game. Over 30 Years it takes a significant toll on government debt owed.


The “fly-in-the-Ointment” in this scenario is the ability to achieve economic growth greater than 3% to sustain 3% rates with an inflation hurdle off over 4% restricting available capital investment.

This is no small problem when we remember we are facing:

  • Looming Era of Stagflation
  • 3% Finance Rates Killing Housing for example,
  • Zombie Corporations likely to begin failing in mass,
  • Actual US interest debt payments versus revenue receipts.

This is the real challenge that comes with the new regime and Financial Repression Mod III.


BlackRock and major global money managers are already suggesting that we may be moving towards a regime era of total returns being 7.5% but built from bond yields and duration with only a sprinkling of equity over the next 10 years.

Clearly they are signaling we have entered a new era.


The economic growth challenge cannot be understated. We have been talking about this we published our 2017 Thesis paper entitled “Illusion of Growth”.


Our latest LONGWave video entitled “The Beta Drought Decade” was dedicated to exactly this subject. I won’t revisit it here but refer you to the video.


I have found that the DJI : Gold Ratio chart to be a valuable predictor of secular and cyclical trends. When combined with some simple technical trend analysis.

You can see on the left it identified the cyclical period of stagflation as it unfolded and persisted from the late 60’s to the early 80’s. It also identifies a second cyclical period, this of stagnation, from the Dotcom implosion through to approximately 2011. Both were good periods to hold gold while equities performed poorly.

The large trend channel suggests we have been in a downward SECULAR period of Stagnation since the Dotcom Bubble which is presently testing its upper channel.

Exploding this inflection point has  suggested we are possibly entering a 12-24 month period before this  major inflection point is resolved.

This matches our predictions that we will see market lows of 3000-3300 (our long held 3270 target) in early 2023 before a strong rally delivers a possible market double top or higher by YE 2023 or 2024.  A volatile market based on central bank policy movements which then resolve to either a major move downward into an era of Stagflation within our Secular period of stagnation or heads higher.

Our current view is strongly with the former – but time will tell.

I set the stage with this chart ..


,, because  it better prepares us for where Financial Repression is likely headed in achieving the  new regime targets I just suggested.

Many investors today still pretend that we’re in the system that we had from 1980 to 2020. We’re not. We’re going through fundamental, lasting changes on many levels

Most developed economies are undergoing a fundamental shift and this is why the system most investors have become accustomed to over the past 40 years is no longer valid.

As a consequence Financial Repression will become a much more central driver over the next 15 to 20 years.

We are likely to see a boom in capital investment and a re-industrialization of Western economies driven by government directed policies and De-Globalization.

Many people will like it at first, before years of badly misallocated capital will lead to stagflation.


This will be structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies.

In the past four decades, we have become used to the idea that our economies are guided by free markets.

We are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore.

I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. This is nothing new, as it was the system that prevailed from 1939 to 1979.

We have just forgotten how it works, because most economists are trained in free market economics, not in history.


The main reason is that our debt levels have simply grown too high. Total private and public sector debt in the US is at 290% of GDP. It’s at a whopping 371% in France and above 250% in many other Western economies, including Japan. The Great Recession of 2008 has already made clear to us that this level of debt was way too high.

Back in 2008, the world economy came to the brink of a deflationary debt liquidation, where the entire system was at risk crashing down.

We’ve known that for years. We can’t stand normal, necessary recessions anymore without fearing a collapse of the system.

So the level of debt – private and public – to GDP has to come down, and the easiest way to do that is by increasing the growth rate of nominal GDP. That was the way it was done in the decades after World War II.


The structural argument is fundamentally that the power to control the creation of money has moved from central banks to governments.

By issuing state guarantees on bank credit during the Covid crisis, governments have effectively taken over the levers to control the creation of money.

Of course, the pushback to my prediction was that this was only a temporary emergency measure to combat the effects of the pandemic. But now we have another emergency, with the war in Ukraine and the energy crisis that comes with it.

There is always going to be another emergency which means governments won’t retreat from these policies.

Just to give you some statistics on bank loans to corporate entities within the European Union since February 2020: Out of all the new loans in Germany, 40% are guaranteed by the government. In France, it’s 70% of all new loans, and in Italy it’s over 100%, because they migrate old maturing credit to new, government-guaranteed schemes.

Just recently, Germany has come up with a huge new guarantee scheme to cover the effects of the energy crisis. This is the new normal.

For the government, credit guarantees are like the magic money tree: the closest thing to free money. They don’t have to issue more government debt, they don’t need to raise taxes, they just issue credit guarantees to the commercial banks.


By controlling the growth of credit, governments gain an easy way to control and steer the economy.

It’s easy for them in the way that credit guarantees are only a contingent liability on the balance sheet of the state. By telling banks how and where to grant guaranteed loans, governments can direct investment where they want it to, be it energy, projects aimed at reducing inequality, or general investments to combat climate change. By guiding the growth of credit and therefore the growth of money, they can control the nominal growth of the economy – at least that is the thinking!


Given that nominal growth consists of real growth plus inflation, the easiest way to do this is through higher inflation.

Engineering a higher nominal GDP growth through a higher structural level of inflation is a proven way to get rid of high levels of debt. That’s exactly how many countries, including the US and the UK, got rid of their debt after World War II. Of course nobody will ever say this officially, and most politicians are probably not even aware of this, but pushing nominal growth through a higher dose of inflation is the desired outcome here.

Don’t forget that in many Western economies, total debt to GDP is considerably higher today than it was even after World War II.

What level of inflation would do the trick?

It appears we are likely to see consumer price inflation settling into a range between 4 and 6%. Without the energy shock, we would probably be there now.

Why 4 to 6%?  Because it has to be a level that the government can get away with.

Financial repression means stealing money from savers and old people slowly. The slow part is important in order for the pain not to become too apparent. We’re already seeing respected economists and central bankers arguing that inflation should indeed be allowed at a higher level than the 2% target they set in the past. Our frame of reference is already shifting up.


At the same time, central banks have turned very hawkish in their fight against inflation. So how does that square?

Today we have a disconnect between the hawkish rhetorics of central banks and the actions of governments. Monetary policy is trying to hit the brakes hard, while fiscal policy tries to mitigate the effects of rising prices through vast payouts.

An example: When the German government introduced a €200 bn scheme to protect households and industry from rising energy prices, they’re creating a fiscal stimulus at the same time as the ECB is trying to rein in their monetary policy.

Who wins? The government!

Did Berlin ask the ECB whether they can create a rescue package? Did any other government ask? No. This is considered emergency finance.

No government is asking for permission from the central bank to introduce loan guarantees. They just do it.

Central banks are becoming increasingly impotent.

This is a shift of power that cannot be underestimated.  Our whole economic system of the past 40 years was built on the assumption that the growth of credit and therefore broad money in the economy was controlled through the level of interest rates – and that central banks controlled interest rates.

But now, when governments take control of private credit creation through the banking system by guaranteeing loans, central banks are pushed out of their role.


There’s another way of looking at today’s loud, hawkish rhetoric by central banks: Teddy Roosevelt once said that, in terms of foreign policy, one should speak softly and carry a big stick. What does it tell you when central banks speak loudly?

Perhaps they’re not carrying a big stick anymore.

This is certainly something we would expect from the ECB and definitely to the Bank of England and the Bank of Japan.  These countries are already well on their path to financial repression.

It will happen in the US, too, but we have a lag there – which is why the dollar is rising so sharply.


Investment money flows from Europe and Japan towards America. But there will come a point where it will be too much for the US as well.

Watch the level of bond yields. There is a level of bond yields that is just unacceptable for the US, because it would hurt the economy too much.

The argument for the past two years was that Europe can’t let rates go up, not even from current levels. The private sector debt service ratio in France is 20%, in Belgium and the Netherlands it’s even higher. It’s 11% in Germany and about 13% in the US. With rising interest rates, it won’t take long until there will be serious pain. So it’s just a matter of time before we all get there, but Europe is at the forefront.

First, governments directly interfere in the banking sector. By issuing credit guarantees, they effectively take control of the creation of broad money and steer investment where they want it to. Then, the government would aim for a consistently high growth rate of money, but not too high.

Again, history shows us the pattern: The UK had five big banks after World War II, and at the beginning of each year the government would tell them by what percentage rate their balance sheet should grow that year. By doing this, you can set the growth rate of broad money and nominal GDP. And if you know that your economy is capable of, say, 2% real growth, you know the rest would be filled by inflation.

As a third prerequisite you need a domestic investor base that is captured by the regulatory framework and has to buy your government bonds, regardless of their yield. This way, you prevent bond yields from rising above the rate of inflation. All this is in place today, as many insurance companies and pension funds have no choice but to buy government bonds.

The government just has to engineer a level of nominal growth and of inflation that is consistently somewhat higher than interest rates in order to shrink the debt to GDP ratio.

Again, this is how it was done after World War II. The crucial thing is that we are moving from a mechanism where bank credit is controlled by interest rates to a quantitative mechanism that is politicized.

This is the politicization of credit.


This is in fact happening today.

We are headed into a significant growth slowdown, even a recession, and bank credit is still growing. The classic definition of a banker used to be that he lends you an umbrella but would take it away at the first sight of rain. Not this time.

Banks keep lending!

The CFO of Commerzbank was asked about this fact in July, and she said that the government would not allow large debtors to fail. That, to me, was a transformational statement.

If you are a banker who believes in private sector credit risk, you stop lending when the economy is headed into a recession. But if you are a banker who believes in government guarantees, you keep lending.

I was shocked at how small loan loss reserves were in the Q3 earnings conference  calls.

Banks keep lending, and nominal GDP may keep growing.

That’s why, in nominal terms, we may not see the expected economic contraction time will tell.


Will there come a point where the famed bond market vigilantes would step in and demand significantly higher yields on government bonds? Likely not.

First, we already have a captured investor base that just has to buy government bonds. And if push comes to shove, the central bank would step in and prevent yields from rising higher, with the ultimate policy being overt or covert yield curve control.

What if central banks don’t want to play along and try to regain control over the creation of money?

They could, but in order to do that, they would really have to go to war with their own government. This will be very hard, because the politicians in government will say they are elected to pursue these policies. They are elected to keep energy prices down, elected to fight climate change, elected to invest in defense and to reduce inequality.

Arthur Burns, who was the Fed chairman during the Seventies, explained in a speech in 1979 why he lost control of inflation. There was an elected government, he said, elected to fight a war in Vietnam, elected to reduce inequality through Lyndon B. Johnson’s Great Society programs. Burns said it wasn’t his job to stop the war or the Great Society programs. These were political choices.

It’s the same today!

People are screaming for energy relief, they want defense from Putin, they want to do something against climate change. People want that, and elected governments claim to follow the will of the people. No central banker will oppose that. After all, many of the things that are associated with financial repression will be quite popular.


Financial repression means engineering an inflation rate in the area of 4 to 6% and thereby achieving a nominal GDP growth rate of, say, 6 to 8%, while interest rates are kept at a lower level.

Savers won’t like it, but debtors and young people will.

People’s wages will rise. Financial repression moves wealth from savers to debtors, and from old to young people.

It will allow a lot of investment directed into things that people care about. Just imagine what will happen when we decide to break free from our one-sided addiction of having pretty much everything we consume produced in China. This will mean a huge homeshoring or friendshoring boom, capital investment on a massive scale into the reindustrialisation of our own economies. Well, maybe not so much in Switzerland, but a lot of production could move back to Europe, to Mexico, to the US, even to the UK. We have not had a capex boom since 1994, when China devalued its currency.

We’re only at the start of this process?  I think we’ll need at least 15 years of government-directed investment and financial repression. Average total debt to GDP is at 300% today. You’ll want to see it down to 200% or less.

The endgame here is likely what witnessed in the stagflation of the 1970s, when we had high inflation in combination with high unemployment.

People are already talking about stagflation today.

That’s nonsense. They see high inflation and a slowing economy and think that’s stagflation. This is wrong. Stagflation is the combination of high inflation and high unemployment. That’s not what we have today, as we have record low unemployment. You get stagflation after years of badly misallocated capital, which tends to happen when the government interferes for too long in the allocation of capital. When the UK government did this in the 1950s and 60s, they allocated a lot of capital into coal mining, automobile production and the Concorde. It turned out that the UK didn’t have a future in any of those industries, so it was wasted and we ended up with high unemployment.

So the endgame will be a 1970s style stagflation, but we’re not there by a long shot.

First comes the seemingly benign part, which is driven by a boom in capital investment and high growth in nominal GDP. Many people will like that.

Only much later, when we get high inflation and high unemployment, when the scale of misallocated capital manifests itself in a high misery index, will people vote to change the system again.

In 1979 and 1980 they voted for Thatcher and Reagan, and they accepted the hard monetary policy of Paul Volcker. But there is a journey to be travelled to get to that point. And don’t forget, by the time Thatcher and Reagan came in, debt to GDP had already come down to new lows. That enabled them to introduce their free market policies, which would probably not have been possible if debt to GDP were much higher.

So that’s why we’re in for a long social and political journey. What you have learned in market economics in the past forty years will be useless in the new world. For the next twenty years, you need to get familiar with the concepts of political economy.


What would have to happen to avoid this path?

  1. If governments went out of interfering with the banking system,
  2. Reinstated private sector credit risk and
  3. Handed back control over the growth of money to central bankers.
  4. Also, if we had a huge productivity revolution that would make real GDP grow at 4%. This would allow us to keep inflation at 2% in order to get nominal growth of 6%.

We can’t forecast productivity, and I never want to underestimate human ingenuity, so we’ll see about that. Another possibility would be voters telling their governments to stop these policies by voting them out of office. But this is not likely because, as mentioned, most people will like this environment at first.


What will this new world mean for investors?

  1. Avoid government bonds. Investors in government debt are the ones who will be robbed slowly.
  2. Within equities, there are sectors that will do very well.
    1. The great problems we have of energy, climate change, defense, inequality, our dependence on production from China – will all be solved by massive investment.
    2. This CAPEX boom could last for a long time.
    3. Companies that are geared to this renaissance of capital spending will do well.
  3. Gold will do well once people realize that inflation won’t come down to pre-2020 levels but will settle between 4 and 6%. The disappointing performance of gold this year is somewhat clouded by the strong dollar. In yen, euro or sterling, gold has done pretty well already.


There are two things we didn’t talk about in this coming Financial Repression Mod III  that are critical and could have profound outcomes on the outline I have shown here.


The first is something that is referred to as the Unholy Trinity. Countries can have two of the three monetary tenets shown here. They can’t have all three!

Presently most of the developed economies are operating with Independent Monetary Policies and Free capital Flows. They don’t peg their Exchange Rates.

I show most countries with a red “X” except the US with a Green “X” only to suggest that currently there are unprecedented pressures on all countries to contain the fall in their currencies as we witnessed a “Flight-to-Safety” into the US Dollar. This is a major problem that the recent fall in the dollar has at least temporarily relieved a little pressure. However, it is still a big worry to all global economies and global growth.

Pegging Currencies may force countries to give up Free Capital Flows or a coordinated “give-up” of independent Monetary Policy.

Something for you to think long and hard about!



We are clearly and steadily advancing on this roadmap to a collapse or maybe more likely, a resetting of Fiat Currencies to better achieve sound money.

The BRIC block of countries and their increasing membership of commodity based economies suggest that sound money may increasingly be backed by hard assets.

This is coming either by natural evolution or political conflict! It is likely to be the later!


As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.

That day is still in the future so take advantage of the opportunities as they currently exist.

Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.

The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.


I would like take a moment as a reminder:

DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussion purposes ONLY.

As negative as these comments often are, there has seldom been a better time for investing.  However, it requires careful analysis and not following what have traditionally been the true and tried approaches.

Do your reading and make sure you have a knowledgeable and well informed financial advisor.

So until we talk again, may 2022 turn out to be an outstanding investment year for you and your family.

Thank you for listening.